Is Apple Still a Buy?

It's inevitable and undeniable that
Apple's (Nasdaq: AAPL)
growth is slowing. In fact, a few years from now, sales of iPhones,
iPads and other hardware could slow to single digits.

Apple's amazing growth

Fiscal year ends September

Consider that Apple's sales have grown at least 20% in eight of
the past nine years. This amazing growth should happen again in the
current fiscal year that began in October. But after that, Apple's
days of 20%-plus sales growth may be over. That's what happens when
a company's revenue base starts to approach $200 billion.

Make no mistake, boosting sales from under $10 billion in fiscal
(September) 2004 to a projected $192 billion in the current year is
the key factor behind Apple's ever-rising stock price. But in the
years ahead, itwill be another factor that will help propelshares
to fresh heights.

That factor: rising recurring revenue per user. We've known all
along that Apple's main goal was to seed the world with its
hardware, so it can eventually sell software and services. The
highly popular iTunes music service was just the beginning. The
iPad, with its expanding level of apps and video offerings is just
another leg. An Apple-based TV, rumored to launch in coming months,
is the final leg to the stool.

Once all of these hardware platforms are in place, expect to
hear alot more about how Apple intends to become your home
entertainment center, virtually replacing the cable TV connection
upon which millions of Americans have come to rely. Apple will
deliver a competitively-priced suite of video, audio and gaming
services likely to rival what the average consumer now pays for a
monthly, premium cable TV package (assuming they "cut the cord"
from cable TV, as Apple hopes).

To be sure, the broad-based hardware platform needed by
consumers is quickly coming into place. In effect, Apple has begun
to see saturation in themarket for iPhones. Soon that could be the
case for iPads, and eventually will be the case for its anticipated
TV. Indeed, you could argue that a fully-saturated hardware base
mightmean outright revenue declines for Apple in this area.

Yet flat or declining sales for hardware will be more than
offset by quickly-rising recurring software sales. In effect, the
top-line growth is likely to cool, but a shift away from hardware
should help margins, which means Apple's bottom-line should keep
growing at a solid clip. The challenge for management is to clearly
articulate howprofit margins for the anticipated TV sets will be
so-so at best, but will lay the foundation for a compelling
subscription service that carries recurring high-margin revenue.
Once that happens, investors will be more able to see how Apple's
per share profits, which are slated to rise from $44 in the fiscal
year just ended to $58 a share by fiscal 2014, could move to $75 a
share by later in the decade.

And it's thebottom line that will likely have investors pushing
this stock back up above $700 a share (representing 40%
upside) in coming years.

To get a sense of Apple's latent value, you need only look at
the company'sbalance sheet .

Apple's fast-growingcash pile

Apple didn't reach the $50 billion in cash level until fiscal
2010, yet by fiscal 2012, this figure had already exceeded $120
billion. Analysts expectfree cash flow to stay strong for Apple,
and predict the company will have $200 billion in the bank by
fiscal 2014, and $250 billion in the bank by 2015.

To put that in perspective, the recent pullback in Apple's stock
means projected 2015 cash will be more than half of the current
value. If you back out the $200 billion Apple will likely have on
its books by fiscal 2014, then Apple is now valued at around $280
billion. That's just 5.5 times trailing operatingcash flow . It's
hard to overstate just how cheap this stock has become, in relation
to cash and cash flow.

Risks to Consider:
Much rides on Apple's imminent push into the TV business. The
efforts are likely to represent the culmination of all that Apple
has been working toward, and the company can't afford to bungle the
launch.

Action to Take -->
Apple's management has never gone to much trouble when it comes to
enlightening investors about the company's growth prospects. The
meteoric sales growth has made that unnecessary. But we're entering
a new era for Apple, as hardware sales growth inevitably slows, but
rising software sales pick up the slack. As a result, management
will need to step out of its comfort zone and start talking up
future growth plans.

-- David Sterman

David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.